Tax incentives planned to make India a hub for telecom manufacturing

Taking a leaf out of the Chinese book of low-cost manufacturing that has made it the global hub for assembling mobile phones and accessories, the government is likely to offer telecom manufacturing a range of concessions, including a 10-year income-tax holiday, excise waiver and low-cost bank loans.

The tax holiday, likely to be announced in the general Budget for FY15, will be similar to the one offered to the software sector by the earlier NDA government.

It will be supplemented by a deferred payment plan for excise duty over five years.

The timing of the proposal is significant because rising wage costs have been encouraging many China-based manufacturers to scout for alternatives in Asia.

The proposal by the finance ministry has been approved by the commerce ministry. It has said this will spur “telecom manufacturing which should be seen as essential infrastructure for development and self reliance”.

Currently, a 10 per cent excise duty is levied on domestic telecom equipment producers who are not located in special economic zones. However, since these zones for manufacturing have not yet taken off, no tax rebate is in effect available.

A government paper accessed by The Indian Express says, “These (concessions) would enable these telecom equipment makers to become competitive vis-a-vis their global counterparts. The actual loss of revenue would be offset in terms of job creation, value-addition, research and development.”

On Wednesday, officials of Nokia, which has one of the world’s largest handset manufacturing facilities in Tamil Nadu, met minister of state for commerce and industry Nirmala Sitharaman. Nokia’s running tax dispute with the finance ministry was the primary reason for the company’s officials to call on the minister; the pre-budget meeting, however, also indicated the importance the government has attached to reviving the sector.

The government also plans to provide an interest rate subsidy of 3 per cent to these manufacturers for export of their products. In FY13 India imported about Rs 54,000 crore of telecom equipment, while exports was about Rs 20,000 crore.

“This only indicates that Indian telecom equipment industry do have manufacturing capability, but face intense competition from their global counterparts”, the paper notes. It says that such subsidy on a larger scale is the norm in China, Europe and even the US.

Export financing would reduce transaction costs and make the products of Indian manufacturers competitive for exports.